Frozen Credit from Frozen Banks?

Not after the stimulus fund

Would a short term loan stimulate your business at this time? Banks are expected to facilitate more credit to recessed companies with a fat stimulus fund of $187.5 billion injected into the nation’s largest banks. Now will the bank lend the money to you and your struggling business?

It seems the banks’ credit facilities are still frozen. Banks have almost shut all doors to corporate and private credit. According to data provided in the last quarter of 2008 by the Deal Pipeline, debtor-in-possession loans were drastically reduced from $7.9 billion to $2.9 billion. With the vivid knowledge of several distressed companies, the banks are adamantly closing their coffers. The question then is why?

Why Should We?

Why are banks adamantly holding back on credit facilities despite all criticisms? Banking chiefs defended their position. They explained that the stimulus fund is to shore up capital and support lending. They insisted that they are not under any obligation to make new loans. “We don’t write $15 billion in loans because we got $15 billion from the government.” said BofA CEO Kenneth D. Lewis.

Banking CEOs believe that there is little financial incentive to make fresh loans in the current situation. New corporate loans are immediately marked down to between 60¢ and 80¢ on the dollar, forcing banks to take a hit on the debt. It’s more lucrative for them to buy old loans that are discounted already.

Hoarding capital out of fear?

“Shouldn’t we also be cautious so that we can stay afloat in this stormy weather?” is their argument. Banks are hoarding capital out of fear. Under federal rules, banks are required to maintain a certain level of capital based on their assets. When they incur losses, they either have to raise more capital or sell assets to keep those ratios in check. After raising money from outside investors and receiving bailout money in recent months, most big banks comfortably meet the federal capital standards.

Shouldn’t we leverage?

In banks’ balance sheets there are problematic assets, like securities whose losses can quickly become permanent or performing loans that are at the verged of becoming non performing. These losses that seemed temporary can change to permanent losses. This means these banks would face another wave of losses, which may only further erode their capital.

Companies have already taken huge hits from sub-prime mortgages and other risky debts. Other areas that is making these financiers tread with caution by holding back from new credit is the wave of losses that could emerge from commercial real estate and traditional home mortgages. Since no one knows when the financial tsunami will end, it’s easier to understand why they are holding back, after all, several shareholders are depending on them to survive.

So what’s someone like you and me to do if we need a short term loan to keep our business afloat but the banks are holding back on lending? Thankfully, we can get a short term loan here, at Personal Money Store to tide us over.